Is it a Good Idea to Pay Off Debt with a Home Equity Loan?
Many Canadians these days are struggling with high-interest debt. Mortgage solutions such as home equity loans are one option that many homeowners are turning to in order to help them get out of debt. But are these tools really a good idea?
Consolidating your debt and lowering your monthly interest payments can definitely help your financial situation and it can help you pay off your debt faster. The problem is that many Canadians once they get some financial relief, end up running their debt right up again. If they have already borrowed against the equity in their home, they can end up in a worse situation than before.
So how do you ensure this doesn’t happen?
It starts by understanding what a home equity loan is and what you need to do if you want to use one to help yourself get out of debt.
What is a home equity loan?
A home equity loan is a secured and revolving of credit that uses your home equity as collateral. Your lender will approve a credit limit that you can borrow from and then you may borrow and pay back money from that credit limit as often as you like without going over the maximum.
How to use a home equity loan to pay off debt?
Once you are approved for a home equity loan, you may borrow money to pay back higher interest debt such as credit cards. The minimum payment that you will have to make each month on the home equity loan will depend on how much money you have borrowed.
Strategies for using a home equity loan to get out of debt
If you cannot make the payments on your home equity loan, you risk losing your house. Therefore, if you are going to use one, you need to be smart and strategic about it.
Here are a few tips:
- Pay back more than the minimum amount. Even if it’s only an extra $5 a month, this will still help you to pay off your debt faster.
- Create a budget. If you go back into debt, you will end up in a worse situation than before.
- Start an emergency fund. Even if you are disciplined enough to follow a strict budget, an emergency car repair can throw you off. Start an emergency fund so that you won’t have to rely on credit when life happens.
- Talk to your mortgage broker. Home equity loans can be a good tool to help you get out of debt but they are not the only tool. Depending on your situation, your mortgage broker might recommend other strategies such as a second mortgage or refinancing.
If you would like to know whether a home equity loan is a good way for you to get out of debt, contact Matrix Mortgage Global today. A member of our team would be happy to help.